The sacking of Bo Xilai as Party boss in Chongqing brings a spectacular halt to his political career, regardless of what has physically happened to him now, still unknown. Bo’s hoped of promotion to the top rung of the party when it changes its leadership later this year had been on the line since last month when his former close ally, Chongqing’s former police chief, Wang Lijun, tried to defect to the U.S. Wang is currently under investigation and has now been sacked as Chongqing’s vice-mayor, too. Bo may well now follow him in falling under investigation.

Wang’s was the iron fist that cracked down on organized crime and on businessmen and local officials accused of being corrupt by Bo’s administration in Chongqing, which was also marked by its prominent use of nostalgic Maoist era ‘red’ propaganda. The high-profile, popularist Bo was seen as a figurehead for the faction within the Party that wanted to revert to more traditional political means of asserting the Party’s legitimacy to rule. Wang Yang, the Guangdong party chief, is seen as representing the faction leaning towards more economic and political openness. The two men were seen as rivals for promotion to the Politburo’s standing committee, the inner sanctum of the Party’s leadership, later this year. How Bo’s sacking affects that ideological divide, beyond the obvious implications that he himself is gone for now, will take some time to become clear–not that that will stop the speculation.

The factional fault lines within the Party are complex, even within the princelings, the elite collective dynasty of some 400 families descended from Mao’s revolutionary leaders that holds extensive sway over the Party, government, business and the military. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; harder line economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions; and some deeply entrenched vested interests who see themselves losing from any change.

Speaking at a press conference after the conclusion of the annual parliamentary session, but at a time when the decision to sack Bo would have been made, Prime Minister Wen Jiabao said that “the Chongqing authorities must seriously reflect on and draw lessons from the Wang Lijun incident”. Wen also said that China needed not only economic reform but also political structural reform, especially the reform of the leadership system of the Party and the government, warning of another Cultural Revolution if they did not happen. Wen has often spoken of the need for such political reform. He has not publicly warned in such dramatic terms of the consequences of failing to undertake it. That gave plenty of scope to those who speculated that the factional differences within the upper echelons of the Party were deeper than had been thought. And it reinforces our view that the Party faces its most important leadership transition in the three decades since Deng Xioaping set it and China on the road of economic reform.

The dilemma is this: If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger, and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, as economic history suggests, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, however, the Party’s legitimacy to monopolistic rule rests on an ideological footing, the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and gamble it can defy economic history by becoming the world’s first developed economy and single-party state. So, again, managing the role of government in the economy but arbitrating between state-owned vested interests becomes the new leadership’s most important concern, and one made more complex by having to operate against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism, rising power and status.

Who now gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how that great divide liea, and thus how China develops over the next decisive decade. Bo’s sacking tilts the scale towards the economic reforms, but it would be a fool who thought that the scale had tipped decisively. And it would also be wise to remember that all those jockeying for position are united in preserving the Party’s grip on power.

Footnote: Zhang Dejiang, a vice-premier and Politburo veteran who is a North Korea expert and has a reputation for maintaining strict social stability, takes over from Bo in Chongqing. He was Party secretary in Guangdong from 2002 to 2007, taking over just before the SARS outbreak and was criticized for his tardy response to the epidemic.